Funding Deal Gives FAO New Life

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FAO Inc. dodged a potentially fatal bullet last week when an equity investor group and bank lenders agreed on the group's purchase of $30 million in equity financing. The agreement likely will let FAO emerge from bankruptcy April 24.

The situation looked bleak when the company announced April 14 that the investors had withdrawn their plans for the equity financing. Without the $30 million investment, FAO would have been unable to complete exit funding for its planned emergence from bankruptcy April 18, the day when its rights to use cash that is collateral for the loans it owes was due to expire.

Alternatives included obtaining replacement equity funding to complete its confirmed plan, a sale of all or part of its operations and liquidation.

The company's existing lenders, led by Fleet Retail Finance, agreed to extend the April 18 deadline at a hearing April 17 at U.S. Bankruptcy Court for the District of Delaware.

"Our cash collateral agreement has been extended through April 24, and we expect the plan to emerge from bankruptcy to become effective early [this] week and begin making distributions to our creditors," company spokesman Alan Marcus said. "There had been complications with negotiations. The equity investor group had to iron out details of the terms with the bank lenders. They have been ironed out over the course of the last few days."

The equity investor group, led by Hancock Partners and Kayne Anderson Capital Advisors, includes FAO chairman Fred Kayne; Richard Kayne, an FAO board member and CEO of Kayne Anderson; and Saks Inc.

"[Liquidation] was always an option [but] it was the most highly unlikely of options, but after the complications came up, we had to pursue every alternative that was available to us," Marcus said. "It has been a fluid situation."

He said there were no plans to scale back catalog or e-commerce operations. Also on track is the company's planned partnership with Saks involving the opening of toy boutiques in Saks stores this year.

FAO, formerly The Right Start Inc., owns and operates FAO Schwarz, The Right Start and Zany Brainy.

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